Navigating Required Minimum Distributions with Annuities

A financial advisor explaining retirement strategies to a client.

Using an income annuity to help satisfy Required Minimum Distributions (RMDs) from an IRA or other qualified account can be a disciplined and highly efficient strategy. Once RMDs begin, the IRS requires you to withdraw a calculated percentage each year — whether you need the income or not. An income annuity can convert a portion of those retirement assets into a predictable, guaranteed stream of income that naturally helps cover those required withdrawals.

Many income annuities today offer payout rates that translate into significantly higher guaranteed income percentages than most conservative investments can provide. When structured properly, some carriers illustrate contractual income rates exceeding 8% annually for life. It’s important to understand this is not an “interest rate” in the traditional sense, but a guaranteed lifetime payout rate based on your age and contract terms. Because of that higher payout percentage, a substantial portion — and in some cases most — of your annual RMD obligation can be satisfied by the annuity income alone.

If you have several years before RMDs begin, deferred income annuities may offer even stronger payout guarantees. By allowing the income base to grow during the deferral period, the future lifetime income amount increases. This can position you to enter your RMD years with a higher guaranteed stream, creating greater efficiency when distributions are required.

The most important element to understand is that this is a lifetime guarantee. The income continues as long as you live, regardless of market conditions. By carving out a portion of retirement funds to create a dependable income floor, you may gain the confidence to invest other assets more aggressively for growth. In other words, securing your required income needs first can allow the rest of your portfolio to work with greater flexibility and purpose.